Breaking the Cartel

Fortnightly Magazine - September 2008

Energy issues took center stage this summer. Record gasoline prices drove the U.S. presidential campaign to focus on energy policy issues, especially offshore drilling. Investor T. Boone Pickens and former Vice President Al Gore initiated massive marketing campaigns to promote their energy plans. Even socialite Paris Hilton got into the act, responding to a John McCain ad with her own spoof video—which presented her surprisingly cogent solutions to the energy crisis.

To get a reality check, we sought out Gal Luft, executive director of the Institute for the Analysis of Global Security. The Washington, D.C.-based think tank focuses on the interplay between energy policy and national security.

 

Fortnightly: Politicians frequently talk about achieving energy independence, but arguably this idea is a pipedream—and maybe not desirable anyway. What’s your perspective on energy independence?

Luft: It depends on how you define energy independence. Some people view it as autarky, not importing anything from anybody. That’s not our definition. Energy independence means not having to kowtow to countries that control our energy supply.

We have no problem importing energy from countries that don’t use energy as a weapon, or manipulate the price of energy, or advocate the destruction of America. We wouldn’t be talking about energy independence if all our oil came from Scandinavia or Canada, because that’s not a security problem. The problem starts when you have a cartel that controls almost 80 percent of the world’s oil resources, and uses oil as a geopolitical weapon.

Oil isn’t like any other commodity. It’s not like corn flakes. It’s a strategic commodity because it dominates the transportation sector and underlies the global economy. You can’t look at it the same way as other commodities, because it has strategic value.

 

Fortnightly: T. Boone Pickens is promoting his vision for a massive windpower build-out to displace natural-gas fired power, so the gas can be used to fuel vehicles. On the surface this seems like an interesting idea. What do you think? Is it realistic?

Luft: No, I don’t think it’s realistic. It’s not a good plan, for various reasons.

Shifting from oil to natural gas means shifting from one resource that we don’t have—and that’s controlled by bad actors—to another resource we don’t have—and that’s controlled by pretty much the same bad actors. It’s like jumping from the frying pan into the fire.

But even if that weren’t the case, I have problems with Pickens’ assertion that by increasing wind generation we can free up natural gas to fuel autos. It’s a great idea to generate more power from wind, but who’s to say it will displace natural gas? Market forces will do what they’ll do. I think the Pickens plan would almost guarantee we’ll tie more natural gas-fired capacity into the grid to back up intermittent windpower.

I don’t think this is a plan at all. It’s just a compilation of assertions that don’t really add up. But Pickens has $58 million to spend on a PR campaign, and you can create an enormous amount of attention with that kind of money.

 

Fortnightly: Biofuels seem to have lost their luster recently, as various reports have shown diverting croplands to fuel production causes rising food prices and ultimately starvation in the poorest countries. What’s the realistic near-term role of biofuels in the U.S. energy supply?

Luft: We’ve all been subjected to a campaign of lies and fabrications, funded by defenders of the status quo who want to blame biofuels for all the world’s problems, from poverty to hunger to planetary changes. There’s no doubt food prices are going up, but it’s simply not true that biofuels are causing most of it. What’s causing the increase in food prices is primarily the increase in oil prices, more than 40 percent this year alone. Fertilizer, transportation, packing, processing … everything is affected by the increase in energy costs.

EES North America

Instead of complaining about biofuels we need to augment our biofuels program to collapse the price of oil. Biofuels today are the only solution that can compete with oil. They’re the only thing keeping oil prices from going through the ceiling. If not for biofuels, we’d be paying at least 15 percent more for oil, which would cost our economy $80 billion this year alone. The biofuels program is costing us $4 billion, so it’s a good deal for us to send $4 billion to American farmers rather than $80 billion to countries that hate us.

 

Fortnightly: If concerns about biofuels are driven by disinformation, where’s it coming from?

Luft: I know who’s behind it. It’s primarily the processed food manufacturers.

In the United States almost everything sweet uses corn. Candy, soda, marshmallows … flip the package over and read the list of ingredients. You’ll see most of it is corn, in the form of corn syrup or dextrose. The processed food companies are accustomed to paying $2 or $3 a bushel for corn, but now prices are high. Companies like Nestle and Kraft have to pass the costs on to consumers, so they find boogeymen to take the blame. They’ve found ethanol.1

It’s also a lie that the rising price of food is causing starvation. The poorest people in the world grow food for a living, so now they’re making more money. It’s a complete lie that they are being starved by higher food prices.

If you really care about poor people, the first thing you need to do is break the oil cartel. This is what’s driving people into starvation, because their economies have to pay $120 a barrel for oil. They don’t get a discount for being poor.

 

Fortnightly: What role do you see electricity playing in making America more energy independent?

Luft: Electric transportation is perhaps the biggest piece of the puzzle. As a transportation fuel, electricity is superior to gasoline on almost every level, in terms of cost, the environment and national security. As we shift from oil to electricity, we’re shifting from an imported resource to a primarily domestic resource. People forget that with electricity we already are energy independent—unlike Europe, which is dependent on Russia.

Electric cars are the key. The infrastructure isn’t such a challenge, because most people in America park their cars in garages, and they can plug in at night to buy off-peak electricity from the grid. This means we’re in a better position to move to electric cars than other countries are, where most people park their cars on the street.

There’s an enormous focus right now on plug-in hybrids, which are a very good idea. But we don’t need to wait for plug-in hybrids. Most people don’t drive more than 20 miles a day, so a pure electric car will be quite sufficient for their daily needs. About two-thirds of American households have more than one car anyway, so not all cars need to have a full 300-mile range. You can have one long-haul car and the rest can be short-haul cars that are pure electric.

 

Fortnightly: What changes do you advocate in U.S. energy policy?

Luft: In transportation, the most important thing is an open-fuel standard. Every car sold in America should be flex fuel, so gasoline can compete at the pump against a variety of alternative fuels. If cars are gasoline only, that doesn’t allow competition.

We also have to bring utilities into the transportation sector to offer competition, and to make that happen we need tax credits for early adopters of electric cars. That was a big factor in building the market for the first hybrid cars.

Also utilities should look into the concept of co-generating fuel and power. Integrated coal gasification allows you to produce syngas, which can be made into methanol for use in flex-fuel vehicles. And some utilities are looking into using their CO2 stream to produce algae, which can be used as a feedstock for producing liquid fuels. There are many opportunities for utilities to enter the transportation fuel market, and to make money competing against Big Oil.

 

Fortnightly: Climate change is probably the hottest topic in the utility industry today. What interplay do you see between utilities’ roles in climate change and energy independence?

Luft: You know, the way I see the whole climate-change debate is that you can only address climate change from a position of prosperity. Only rich nations can afford to deal with climate concerns.

Our oil dependence is now undermining our prosperity. Page one is to address energy dependence and the $70 billion we’re bleeding every year because of it. Utilities should focus on contributing to America’s national security and economic security, by providing viable competition to

the Big Oil cartel. Only then can we address climate change.

 

Endnote:

1. In May 2008, Sen. Chuck Grassley (R-Iowa) released documents he said showed the Grocery Manufacturers Association—which represents Kraft, Nestle and other processed food companies—had launched “a national smear campaign against ethanol.” Kraft Foods published a study in June linking food price increases and ethanol mandate. Also in June, Nestle SA CEO Peter Brabeck-Letmathe authored an op-ed column in the Wall Street Journal titled “Biofuels are Indefensible in our Hungry World.”